Indonesia acquisition finance: Squeezed at the margins

12.03.14 / Author: Tim Burroughs, Asian Venture Capital Journal

With bumper LBOs few and far between, banks see limited opportunities for leveraged finance in Indonesia. And in the prevailing economic climate, they aren’t generous at acquisition or operating company level.

All is not well with rupiah liquidity. A couple of years ago credit growth was running at an annual clip of at least 20% but this was never likely to last once Indonesia slipped into a current account deficit. Now, limited supply of local currency means borrowers must go without.

“Loan-to-deposit ratios are at 90% and the required reserve ratio is 8% so domestic banks are tapped out, there is no liquidity,” says Tom Lembong, co-founder of Quvat Management. “Overseas banks can lend dollars so you can get acquisition financing, but there is not going to be any of the local currency financing CVC Capital Partners got for Matahari.”

CVC bought a majority stake in Matahari Department Store, Indonesia’s largest department store operator, in early 2010 for an enterprise valuation of $892 million, placing the asset into an 80-20 joint venture with the seller, the Riady family’s Lippo Group. The two investors made a partial exit through a share placement last year that valued Matahari at $3.3 billion.

It remains a high watermark in the Indonesia deal landscape. The country has yet to see a larger leveraged buyout and then the timing – at both entry and exit – was well conceived.

The buyout is said to have included around $350 million in leveraged financing arranged by CIMB Group and Standard Chartered. A large tranche of this debt was rupiah-denominated and was obtained at a time when local currency rates were at low levels. And then the exit came shortly before Indonesia’s public markets shut down and economic volatility set in.

Hopes dashed

The successful execution of the Matahari financing led to regional and international banks sending teams to Indonesia in search of deals.

“Back then there was always the question of whether local banks were coming in with syndicated loans for acquisition financing. No one had done a pure LBO for a control deal,” says Anthony Yap, head of Southeast Asia leveraged and acquisition finance at HSBC. “There was always that level of uncertainty. Are we going to get it done? Are we going to get security? Is the pricing right to scale the market? Now people are more comfortable.”

The problem is a shortage of transactions. According to AVCJ Research, in the years since Matahari, Indonesia private equity buyouts haven’t topped $220 million in a single 12-month period.

Minority investments still account for the majority of deal flow and these are seen as much harder to finance. Lenders are not able to push the debt through to the operating company level and gain access to cash flows. Rather, they must lend to the holding vehicle and sit behind the majority shareholder in the rankings, usually with no guarantee of dividend flow.

Yap adds that 80% of HSBC’s live opportunities in Indonesia are for corporates – where the parent is able to provide guarantees – and the rest are private equity, although the success rate on minority deals is low.

Syndicated loan volumes in the country reached a record high of $12.7 billion in 2013, according to Thomson Reuters LPC, and most this was corporate work. OCBC was the lead mandated arranger, followed by DBS, ANZ, Standard Chartered, Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank.

Conservative approach

One of the few PE control deals completed last year was Creador’s carve-out of cereals and snack foods producer Simba Indosnack Makmur from Godrej Consumer Products, an Indian conglomerate that wanted to focus on its core home and personal care business. It is said the equity-debt split was 80-20, or leverage of 1.8x EBITDA, provided by an international bank.

“In Indonesia the only type of financing locally is asset-backed,” says Brahmal Vasudevan, CEO of Creador. “They want to see land, a factory, equipment and they are prepared to lend against that. They are not prepared to lend against cash flows, which is something you would see in the West or even in a market like Malaysia. It doesn’t bother us too much because we rely on growth to drive returns.”

Hendrik Susanto, managing director at Ancora Capital, agrees that banks are tightening their standards, based on his portfolio companies’ efforts to obtain working capital loans or credit facilities. The 175 basis point hike in local interest rates last year is also a factor. Having said that, restrictions on bank financing do in theory make it easier for PE investors to source deals.

The weaker commodity exports that contributed to Indonesia’s recent balance of payments and current account woes has also made life difficult for those seeking financing in the natural resources space. Between 2009 and 2011 operators would receive multiple term sheets from banks. Now, with prices weak and rising costs eating into margins, there is less willingness to lend.

“The banks were pretty willing to lend last year and particularly in the first six months. But they are now reducing their appetite, especially in the natural resources space,” says Kay Mock, a founding partner at Saratoga Capital.

“Many natural resources companies are already fairly leveraged and, with weaker pricing and lower cash flows, it would not surprise me if some of the banks were getting nervous.”